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Qantas Cancels 35 787-9s, But Keeps Options

Qantas has cancelled its firm orders for 35 Boeing 787-9 aircraft, but executives say that by moving forward options it can still add -9s from 2016 if it meets its target for turning around its international operation.

The cancellation has no effect on the 15 orders for the -8 version that Qantas is due to take delivery of beginning in 2013, which are earmarked for its Jetstar subsidiary. The 35 -9s were to begin arriving in the 2014/2015 fiscal year, so even though the options have been moved forward by two years, it would effectively face a two-year delay for its first -9s.

CEO Alan Joyce says this delay better fits the carrier’s goal of not growing its international business until this unit returns to profitability. The carrier’s target is to achieve that within three years, and Joyce says the company is on track with this timeline.

Qantas has 50 options and purchase rights for the -9s. Joyce says the restructured deal with Boeing includes the same pricing for the -9 options as in the original agreement, as well as guaranteed delivery slots. According to an airline spokesman, the carrier is not revealing what the split is between options and purchase rights, nor will it disclose the trigger date is for the options.

“We will, if the circumstances are right, take the aircraft,” says Joyce. “What’s great for us is we have the flexibility to significantly increase the fleet” by taking the options from 2016, or “managing capital expenditure if times are tough” at that point, he says.

The 35 firm -9 orders had effectively become options anyway, says CFO Gareth Evans. Because of program delays, Qantas had the right to walk away from the orders, and it exercised those rights.

The restructured deal results in cash flow to the airline of US$433 million. This includes various delay compensation payments – some of which have already been factored into previous years’ results – and the return of pre-delivery payments. The cash flow improvement for the current fiscal year will be US$355 million, and pre-tax profit will be increased by US$140 million.

Qantas also announced its results for the 2011/2012 fiscal year. It reported an underlying profit before tax of A$95 million (US$99.9 million), although it had a statutory loss after tax of A$244 million. This was in line with guidance issued in June, and considerably weaker than the previous year’s results. Contributing factors were an A$645 million increase in fuel prices, and industrial action and a resulting fleet grounding last year that cost A$194 million. One-off restructuring costs totaled A$398 million.

The result was also dragged down by the Qantas international operation, which saw a loss of A$450 million before interest and tax (EBIT). In contrast, the other units were profitable. The Qantas mainline operation as a whole reported an EBIT loss of A$21 million, while Jetstar had an EBIT profit of A$203 million.

The international turnaround plan is expected to spur improvement in this segment in the current fiscal year. Joyce says the major restructuring has already been completed, and the international operation is now at an “inflection point.”

Group capacity is forecast to increase 3-4% in the current fiscal year, with domestic capacity growing 9-11%. Evans admits the domestic increase could lead to pressure on yields, which the carrier is already seeing. Domestic competitors have also been adding capacity, and Qantas believes it needs to maintain a 65% domestic market share to maximize its profit in this segment.